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What Does the New US Mexico Canada Trade Deal Mean?

Professor of Financial Economics and Part-time Value Investor, Transfin.
Oct 9, 2018 9:00 AM 3 min read
Editorial

Following a year of intense negotiations – US, Canada and Mexico recently reached an agreement to keep the North American Free Trade Agreement (NAFTA) alive. The updated trilateral trade deal, now known as the United States-Mexico-Canada Agreement or “USMCA”, would govern more than $1.2tr worth of trade among the three nations.

 

Major changes have been introduced affecting the automobile and dairy industry, labour policies, intellectual property protections, and a few digital trade provisions. Here’s a summary view of the overhauls made to the 25-year old trade agreement:

 

Automobile Industry: Automobiles must have 75% (a substantial increase from 62.5% in the original NAFTA) of their components manufactured in the US, Mexico or Canada to qualify for zero tariffs.

Roughly half the cars sold in America are imported. Many American carmakers depend on imported parts and cars. Not surprisingly, Mexico and Canada account for roughly half of all American auto imports.

 

By compelling car-manufacturers to use locally manufactured auto-parts over cheaper components sourced from Asia, the new deal aims to boost auto parts manufacturing in North America. As a downside, higher cost of manufacturing will be passed on to the consumers.

 

With Donald Trump imposing tariffs on automobiles, price of a typical small car would increase by between $1,400 and $2,000, as per estimates. For instance, Ford reported that tariffs cost it $145m in the second quarter and forecast that trade tensions may cost $500m-600m this year.

 

Labor Provisions: 40-45% of automobile parts need to be made by workers who earn at least $16 an hour. The measure is aimed to boost wages in Mexico, and simultaneously discourage firms from re-assigning work to a lower-wage country.

The average hourly pay for auto manufacturing workers in the US was more than $22 as of June, whereas in Mexico, the number was just over $2 an hour, and the country’s minimum wage requirement for a full day’s work stands at c. $4.15.

 

Mexico has also agreed to pass laws giving workers the right to real union representation, which is currently largely controlled by employers, with little or no say given to workers. The agreement also extends labor protections to migrant workers (who are often from Central America), and protects women from discrimination.

 

Intellectual Property Rights: Terms of copyright increased by 20 years to 70 years beyond the life of the author. Pharma patent term length also increased from from 5 years to 10 years in Mexico, and 8 years to 10 years in Canada.

This can be significant headwind for Indian generic exporting companies where overseas sales account for c. 55-60% of their annual turnover, with US market alone accounting for over 25-30% of the total sales.

 

USMCA also provides for 15-year industrial designs patents and 10-year agricultural chemicals patents.

 

The new trade agreement also raises duty-free shopping limits to $100 to enter Mexico and C$150 ($115) to enter Canada without facing import duties - well above the $50 previously allowed in Mexico and C$20 permitted by Canada.

 

Dairy Sector: Canadian duties on dairy imports outside access to quota range is nearly 300%. Under the USMCA provision, Canada will grant duty-free access to US dairy products representing approximately 3.6% of Canada's annual market.

 

Canada has agreed to eliminate Class 7 milk, which made it cheaper to buy certain high-protein milk products from domestic producers in Canada, thereby restricting any US exports into Canada.

 

"Class 7" milk-pricing category allowed certain quantities of domestic milk to be sold at very low prices under Canada's supply managed milk-marketing system, making domestic milk more competitive with the imported variant.

 

Canada currently has a supply management system for dairy (and eggs and poultry) in place, which closely regulates how much of each product can be produced and places tariffs and quotas on imports of these products.

 

Sunset Clause

 

While NAFTA had an indefinite lifespan, USMCA will expire in 16 years.  The three countries will conduct a joint review six years after the deal enters into force, with an option to extend the deal beyond the 16-year term.

 

US is the clear winner in the tri-lateral deal, standing to gain much more from the new provisions in the automobile industry and access to the much-coveted Canadian diary sector. Canada and Mexico, on the other hand expressed some discomfort in being unable to strike down the recent tariff imposition on steel and aluminum.

 

While the deal has been announced, the three parties are still to officially seal the deal before December 1st, current Mexican President Enrique Peña Nieto’s last day in office.

 

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